Further pain for UAE homeowners with mortgage rate rises in store

Home financers are set to come under pressure to raise mortgage costs for the first time since the financial crisis as interbank borrowing rates spike.

It follows the first rate rise by the US Federal Reserve in almost a decade, and a 17 per cent jump in UAE interbank borrowing rates in the past month.

Homeowners have had a dismal year as property prices fell and the number of transactions slowed amid waning demand.

Things may start getting worse as interest rates on some mortgages rise after the US Fed began tightening its benchmark rate last week – a rate that the central bank of the UAE follows because the dirham is pegged to the US dollar.

The good news is that a quarter of a percentage point rise is unlikely to make a big dent in monthly mortgage payments but the bad news is that if the Fed keeps raising rates next year, repayments will also rise.

The declining price of oil – still the backbone of the UAE economy – would exert further downward pressure on prices, say analysts.

“From a homeowner’s point of view, at this point we are talking about a 25 basis point increase,” said Suvrat Saigal, the head of retail banking at National Bank of Abu Dhabi, the biggest bank by assets in the UAE. “It’s not dramatic.

“There are certainly going to be other factors that could potentially have a bigger impact than a 25 basis increase. I do not believe this particular Fed hike and its outcome will change consumer behaviour vis-à-vis housing.”

Most mortgages in the UAE are benchmarked off Emirates Interbank Offered Rate, or Eibor, a measure of interest rates used by banks when they lend to each other.

The majority of mortgages in the UAE are linked to Eibor, either directly or through a proprietary rate the bank uses that is linked to the measure.

A bank will typically add 3 to 5 percentage points to Eibor to come up with the rate it offers customers. As result, most mortgages range between 4 per cent and 7 per cent.

Bankers point out, however, that the Eibor rates have been going up ahead of the Fed’s move, and that the likelihood of any further steep increases before any further tightening by the Federal reserve would only happen if deposits at banks take a further hit amid falling oil prices. In the past month, the 3-month Eibor, the benchmark used to calculate most flexible mortgages, has gained 17 per cent to 1.024 per cent.

While Mubarak Rashed Al Mansoori, the UAE central bank governor, said last month that rates have been rising in anticipation of a US Fed increase, others have pointed to declining deposits as having a bigger influence on Eibor rates, reflecting falling amounts of money in the banking system.

“Because of the fall in oil prices and weakness in emerging markets, you have seen quite a bit of capital leaving the UAE, so already the banking system is less than it used to be and Eibor is rising in response,” said Simon Kitchen, a Cairo-based chief strategist at the Egyptian investment bank EFG-Hermes.

When it comes to the question of home valuations, higher interest rates typically can dampen real estate prices but supply and demand is usually a better indicator in the UAE.

According to the property data service Reidin, the number of housing transactions in Dubai may have dropped this year by nearly half.

The number of property sales in some parts of the city has fallen by more than 45 per cent since the most recent peak in 2013, Reidin said. The company said that it had also noted an increase in the number of properties purchased with mortgages – a method of buying usually associated with owner-occupiers rather than landlords.

Prices are also declining. Dubai residential property prices are softening because of excess supply and dwindling demand, brokers say.

Average house prices in Dubai fell by a further 4 per cent in the final quarter of this year, meaning that apartments were 16 per cent cheaper than a year ago and villa prices were 14 per cent cheaper, according to the broker CBRE.

The silver lining for consumers however is that, because banks are still competing intensely with each other for customers, the most creditworthy residents are likely to continue getting competitive rates.

“The good news for mortgage customers here is competition for borrowers and particularly the high-quality borrowers who have good credit ratings remains really high,” said Tony Graham, the head of retail banking at United Arab Bank. “It’s a very competitive mortgage market. The Fed hike does matter, but high-quality customers have choice.”